Cross-chain messaging platform Wormhole has introduced native token transfers (NTT) as a way to preserve token characteristics and address liquidity fragmentation across different blockchains.
Nowadays, sending tokens across different blockchain platforms usually requires a token bridge. These bridges often use the ‘lock and mint’ or ‘burn and mint’ approach in facilitating these transfers.
This process involves users locking the native asset into a smart contract on one chain and then trading it for a synthetic version of that asset before transferring it to another chain. Once on another chain, users will again have to go through the process of converting the synthetic asset to a native token.
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However, according to Nikhil Suri, product lead at the Wormhole Foundation, these assets are non-fungible between different interoperability protocols because interoperability protocols deploy packaged assets on behalf of a project, leading to liquidity fragmentation, which can result in poor UX. and suboptimal markets.
“Another disadvantage of packaged assets is that they are owned by interoperability protocol contracts, so they adhere to a fixed token implementation. This limits flexibility for protocols that want to use their own tokens cross-chain, as their tokens will not behave consistently across chains and will not retain any advanced functionality,” Suri told Blockworks.
Another way to transfer assets across different blockchains today could be to have a unified liquidity pool shared by multiple different chains. However, this type of bridging cannot guarantee immediate finality, as the different chains must ensure sufficient liquidity in the pools to meet all requests.
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Unlike existing methods for transferring tokens between chains, NTT includes protocols that natively deploy their canonical token across multiple blockchains and use interoperability layers to facilitate transfers between these canonical deployments.
This means that when new tokens are transferred using the “burn and mint” or “lock and mint” method with multichain NTT, instead of exchanging the original token for a synthetic asset before transferring it to another chain and then switches it back again once it is reached. when it comes to the destination chain, users can transfer native tokens directly from one chain to another.
“Compared to packaged assets, native token transfers ensure that projects maintain ownership, upgradability, and customizability of their tokens across different blockchains. This means that tokens can retain their unique characteristics regardless of which chain they are transferred to,” Suri said. “Native token transfers also prevent liquidity fragmentation by transferring value rather than double counting it.”
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For this reason, Suri believes that native tokens are more than just a technical evolution, but also a step towards realizing the potential of blockchain technology.
“They can serve as long-term solutions that can evolve alongside the protocols that use them,” he said. “As we move forward, interoperability will continue to play an important role in shaping a robust and user-centric DeFi space and give projects the sovereignty to determine what works best for them.”